InsiderOnline Blog: October 2013

The political prognosticators say the 1995/1996 government shutdowns show that budgetary impasses are a bad idea, but the economics, says Tim Cavanaugh, tell a different story:

Despite the greatly ballyhooed furloughs of government employees, unemployment stayed even at 5.6 percent during November 1995, the period of the first spending gap, which ended when a deal cut by President Bill Clinton and Republican legislators allowed government to stay funded at 75 percent.

Unemployment actually dropped to 5.5 percent during the second spending gap, which was more complete than the first.

Unemployment continued to plummet in the months following the shutdown, as a hamstrung Clinton allowed the rate of government spending increases to slow and headed toward the eventual budget surpluses that became the highlight of Clinton’s legacy. According to the Bureau of Labor Statistics, unemployment dropped half a percentage point within a year of the first shutdown and had dipped below five percent by the spring of 1997.

More surprisingly, gross domestic product increased during both quarters covered by the Clinton-era shutdowns. According to the Bureau of Economic Analysis, GDP began the fourth quarter of 1995 at $7.7 trillion and ended the second quarter of 1996 at $7.9 trillion. By the end of the second quarter 1996 GDP had topped $8 trillion.

Personal consumption expenditures, gross private domestic investment and personal income also increased during and immediately after the shutdown.

The GDP numbers are particularly striking because government spending is given outsized weight in GDP measures, which assume that every dollar in federal spending results in a full dollar’s worth of economic activity. Nevertheless, GDP continued to climb despite the suspension of transfer payments. [Daily Caller, September 29]